What Happens When My Adjustible Rate Mortage (ARM) Resets?

Given the mortgage industry crisis, many homeowners want to know how much their monthly mortgage payment will increase when the initial fixed rate period on their ARM has passed.

To calculate your new mortgage payment, you need obtain the four pieces of information below from the “Adjustable Rate Rider” in the loan documents you received at closing or directly from your lender.

Change Dates – The date when your first rate change will occur and the frequency of rate change thereafter; monthly, semi-annually or annually.

Index – The interest rate to which your adjustable rate mortgage is tied, such as Treasury (weekly average yield on T-Bills), LIBOR (London Inter Bank Offer Rate), CMT (Constant Maturity Treasury), and COFI (11th District Cost of Funds Index). All indices are quoted regularly and are widely published in news periodicals and on financial websites like BankRate.

Margin – Amount added to the index, ranging from 1 to 3 percentage points, to obtain the new interest rate on your adjustable rate mortgage.

Rate Caps – Limits on the amount of interest rate adjustment on an ARM are expressed in an “X/Y/Z” format. Where X is the maximum rate change, up or down, at the first adjustment, Y is the maximum periodic adjustment up or down and Z is the maximum increase (life cap) over the initial rate during the life of the contract.

Example: Finding The New Interest Rate On An ARM When The Rate Resets

Loan Type: 3-Year ARM

Original Loan Amount: $100,000

Original Interest Rate: 6.500%

Original Payment: $632.06

Index: Treasury, obtained 45-days before adjustment date

Margin: 2.5%

Rate Caps: 5 / 2 / 6

First Adjustment Date: 11-1-07

Periodic Adjustment: Every 12 months

In our example above, our loan rate will adjust on 11/1, so we searched BankRate and found the Treasury Index at 4.96%. Therefore, at the first adjustment date we can expect the interest rate on our loan to adjust to the lowest of 1) the current index plus the margin or 2) the previous rate plus 5% or 3) the life cap = original interest rate plus 6%

1. Index + Margin - 4.96% + 2.5% = 7.46%

2. Max First Period Adjustment - 6.50% + 5.0% = 11.5%

3. Life Cap - 6.50% + 6.0% = 12.5%

In this case our interest rate would increase from 6.50% to 7.46%.

Thereafter, our loan will adjust annually to the lower of 1) the index plus the margin 2) the previous rate plus the maximum periodic adjustment of 2% or 3) the life = original interest rate plus 6%.

Calculating Your New Monthly Payment

Now that you have your new interest rate, you’ll need to know your outstanding loan balance and the number of years remaining, all of which can be found on your monthly mortgage statement or by contacting your lender. When you have this information, simpy input this information below and calculate your new monthly mortgage payment.

DISCLAIMER - Please note this mortgage calculator is for entertainment and/or research purposes only.